China said it will begin imposing a value-added tax on interest income from government and financial-institution bonds, ending a decades-long exemption that had helped underpin demand for sovereign and policy-bank debt. The surprise policy shift is forcing domestic investors to reassess portfolio allocations that rely on tax-free coupons. Trading desks reported a flurry of enquiries after the announcement, with some money-market funds warning of potential net redemptions if after-tax yields decline. The move comes just after smaller Chinese banks stepped up buying in July, when spot bond turnover reached its highest level this year, according to industry data. Analysts said the new levy could temper that appetite and lift funding costs for both the central government and state-linked lenders.